Friday, April 24, 2009

The cost of TARP

TCF Financial Corporation announced Wednesday that it had completed the repurchase of its TARP preferred stock from the U.S. Treasury. It paid a redemption price of $361.2 million plus accrued dividends of $3.4 million.

TCF Chairman and CEO William A. Cooper said the bank had maintained a strong capital position over the last year through its own operations, and it didn�t need to rely on the public capital infusion to continue its traditional lending pace. Cooper said TCF is the largest bank to pay back TARP funds to the U.S. Treasury.

TCF�s executives had complained that Treasury and the U.S. Congress had subverted the TARP program by changing its rules after banks had joined. Those rules added controls over compensation and dividends programs, and Cooper said those changes contributed to a stigma of weakness and reliance on public support � a stigma that didn�t reflect his bank�s condition.

As part of the agreement for withdrawing from the program, TCF also agreed to reduce its first-quarter dividend from 25 cents to 5 cents.

Contemplate that last sentence: The government required TCF to drop its dividend in order to repay its loan. Would a bank be allowed to make you drop your kid's allowance from $5 a week to $1 before you could pay off the auto loan early? Banks in trouble often end up in agreements with the Fed that include seeking permission to pay any dividends, but banks were brought into TARP as a matter of solidarity, even patriotism. Solidarity isn't free, I guess.

U.S. banks that get preliminary results today of U.S. government stress tests may struggle to raise money after bad assets at the biggest lenders almost tripled on average in the past year.

Pittsburgh-based PNC Financial Services Group Inc. saw nonperforming assets -- those no longer accruing interest -- jump more than fivefold in the first quarter from a year earlier. They more than quadrupled at U.S. Bancorp in Minneapolis. At 13 of the largest U.S. banks, bad assets increased 169 percent on average from a year ago, according to first-quarter data compiled by Bloomberg.

The tests on the 19 largest banks are likely to focus in part on loan quality as a measure of health. The lenders, which may need to raise $1 trillion in capital to cushion losses according to an April 23 KBW Inc. report, may have a hard time persuading investors to give them cash.

...

If the banks learn the results of the stress [tests] today, �it�s a week plus until we find out, that�s where the danger is,� said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York, which manages $150 million of financial stocks. Schutz runs the best-performing financial stock mutual fund over the past year, Burnham Financial Industries. �You get market movement on what might be fact or fiction,� he said.

Even if banks say their capital levels are adequate, the government could require them to raise more money, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said April 16 during the firm�s earnings conference call.

�I don�t know what we need to do because it may not be solely up to us,� Dimon, 53, said in response to a question about whether the firm was planning to issue new equity. �I don�t think we need it.�